This one chart explains it all. It was just a “few years” back when my parents told me that it is important to save money in the bank. Saving money in the bank does have many tangible benefits. Firstly, it creates a pool of emergency funds for a peace of mind. Secondly, it gives you a lump of money to prepare for any opportunities. Thirdly, if you don’t do anything, the banks will give you up to 7% interest per annum (Dec 1980). That sounds good to me!

Fast forward to 2021, the bank is giving on average around 0.05% and it seems to be getting lower. The low interest rate environment has changed many areas of finance. Firstly, it has already affected the insurance companies’ participating plans. Secondly and more importantly, it has lead to the erosion of money.

This means that the money you have now, will be worth less in future. For every $10,000 you have in your bank, the real value of your $10,000 will be halved ~$5,454.84 in 30 years if you continue to keep money in bank. (assuming 2% inflation rate)

You can say that we are in a generation that is “forced” to invest or suffer the erosion of money value with time.

What It Means For You?

Whether you are in your 20s who might be working for the next 40 years (damn) or in your 50s who might be retiring for the next 30 years, we are all exposed to the same erosion. As a retiree, it is important to understand that your savings value will go down in quantity and value. As a working adult, it is important to understand that your hard earned money is worth less down the road.

There is only one obvious thing to do. Either you keep pace with inflation (endowment plans/selected bond funds/etc does a decent job for this) or you have beat inflation. If you want to beat inflation, you will most possibly be expose to other asset classes which might have higher volatility and risk. It is crucial to know your risk profile here before you proceed.  You might be not suitable for certain asset classes and it is important to talk to professional to assess this.

The Chase For Higher Yield

There are only 2 ways to do this. Either you do it yourself or let others do it for you.

Do it yourself: This is an active role. It involves many things such as knowing what asset classes to buy, what assets in the asset classes to choose from, the pros and cons associated into each assets, the co-relationship between each assets, the duration of investment, the investment thesis and when to exit. This list is not exhaustive.

There is a very strong emphasis here on the level of financial knowledge which might take years to acquire. (All this time, still spending most of your waking hour working on the job). It is a longer process but definitely rewardable.

Do it for you: This is a semi passive role. There is still a personal responsibility to know what you are investing in. Otherwise, you are completely at mercy of the provider. In Do It For You, usually a portfolio is readily available. There will be an explanation on the investment thesis and if you subscribe to the investment thesis, you can consider taking up the Do It For You.

Annual reviews or semi-annual reviews are important here to see how the investment is doing. Generally, it is a passive role after that.

Final Thoughts

Whether you choose to do it yourself or do it for you, the reality is that you have to do something. If you don’t, the retirement journey just might be a little hard.

Till then, take care!

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.